(part 2 of 3)
So now you know what a loan modification is, and you have questions, right? Here are the ones I get all the time, right out of the starting gate.
Some Frequently Asked Questions about Loan Modifications
1. Is it legal in my state? Usually. As of this writing, loan mods are legal everywhere, and those laws are probably changing as more and more states move towards an attorney-based system for loan mods. Examples: In California, you must use an attorney if you’re not doing a loan mod for your own property; in Hawaii, the bill has passed, and they will be doing loan mods through attorneys only soon.
2. Can a second mortgage be reduced or even wiped out? Yes, but it depends on the lender as to whether this will happen.
2. Can the principal balance be reduced? Yes, but it’s not a slam dunk by any means, and it’s part of the black box you’ll face with the lender; they will simply do your loan mod based on what will work for them, and give you the result, which might include a principal reduction.
3. Can the interest rate be reduced? Yes, and this is the most likely scenario, possibly in combination with something else such as back payments being rolled in, etc.
4. Is this a refinance, (because I don't qualify?) No, it’s not a refinance and does not require the same qualifications. It’s not a new loan, it’s modifying your current loan.
5. Is there a money-back guarantee? Yes, and it should be free to find out what the attorneys can do for you. Also, some attorneys will take credit cards, which means you could dispute the charges in arrears if they don’t do exactly what they promise or you are dissatisfied with them.
6. Do I have to be behind on payments? No; you used to have to be behind on payments, but that has all changed recently.
7. How much does it cost? It depends. I think you should use an attorney if at all possible, because you have more recourse if something goes wrong, even though it may cost you a bit more up front. I’ve heard amounts varying between $500-$5,000, with the average between $1,500-$3,000. The company I work with, for example, will do the second mortgage for free if it’s with the same bank, so look for some savings there.
8. Can the loan mode be done if I am behind on my payments? Yes, and the lender may choose to forgive your back payments or roll them into the loan.
9. Does my credit get ruined? No, not if you're not behind. If you are behind, your credit has been tarnished, and you might want to work with a credit repair company to help you get it fixed.
10. What’s the success rate? These days, above 80% if you’re working with a reputable firm. Our stats are around 95% acceptance.
11. How long does it take? Again, it depends. I am doing a loan mod, myself, for a neighbor – a very young man whose mom had died and left him the house. I didn’t charge him anything – I did it to find out the process, and because I wanted to help, so it’s perfectly legal. It took us six months so far, and we’re still not done. Every time we go back to the lender, they have another excuse. I found out the industry average for DIY loan mods is 8-9 months, but it’s 1-2 months through an attorney, so though you have to pay an up-front fee, it probably would save you a lot of money over the slower process.
Next week, we’ll talk about how to get in on the business yourself, and take advantage of this new “cottage industry” without taking advantage (even inadvertently) of homeowners.